Spike in Internal Fraud Expected

Historic data indicate a big increase while company-wide layoffs often reveal the culprits.

If history is any guide, corporations can expect a serious increase in internal fraud, legal disputes and regulatory action in the weeks ahead as a result of the current U.S. economic crisis. Now more than ever, CFOs and compliance officers must take careful measures to strictly follow financial risk management standards and ensure new employees have spanking clean records, says Peter Turecek, senior managing director at New York City-based Kroll Inc.

A new report from the global fraud and litigation consultant cites sharp increases in arbitration claims by investors seeking to recoup losses after Black Monday, Oct. 19, 1987, and following the market downturns of 1991 and 1992. The Financial Industry Regulatory Authority (FINRA) reports that new arbitration cases rose 54% from 2007 to 2008 alone, according to Kroll.

Demand for litigation support and asset tracing work for companies with failed investments has increased and so has white-collar crime enforcement, says Turecek. The Securities and Exchange Commission (SEC) pursued 115 enforcement actions related to securities offering frauds—as in Ponzi schemes—compared with 68 in 2007 and 61 in 2006. An FBI official recently told Congress that the agency expects its fraud investigations at major corporations to jump from 38 cases to hundreds as the crisis deepens.

Internal fraud is more prevalent than many expect, Turecek says. “Often we’ll get a call from the CFO or compliance person saying our bookkeeper was terminated and something looks off,” he says. More of these cases—perpetrated by those who are usually first in to work and last out and don’t take vacations—are discovered during massive layoffs.

Fraud in treasury increases in tough times, too, says Jeff Wallace, a partner at Greenwich Treasury Consultants, though these cases aren’t generally acknowledged. “In the treasury department, someone may somehow direct the money to his own pocket, or traders doing foreign FX deals with a bank at off-market rates might get a kickback from the bank’s FX traders,” says Wallace, who focuses on financial risk management consulting. Company-wide lay-offs that touch typically short-staffed treasury departments can also weaken internal treasury controls over operations.

To mitigate this risk, companies might again consider the “classic technique” of bonding treasury officials, Wallace suggests, which protects a company from an individual conducting fraud, and insures against employee theft. Bonding requirements for treasurers were dropped as companies believed they had sufficient controls built into their treasury and bank systems.

However, he notes,“if the CFO or treasurer wants to move money, it is going to get moved regardless,” and he also favors instituting employee hotlines where workers can anonymously report abuse.

Financial Executives: Keeping Track

Edward Neely, David Robinson, Paul Pucino, Brian Evans…

Eddie W. Neely, 57, is the new CFO and executive vice president of Alpha Natural Resources, the $1.9 billion coal supplier, based in Abingdon, Va. Neely replaces David S. Steube, 68, who is retiring. Neely served as secretary of a predecessor company to Alpha and has served as vice president and controller of Alpha since its formation in November 2004.

David Robinson, 43, becomes the new CFO on March 1 of Apartment Investment and Management Company, the $1.7 billion real estate investment trust, based in Denver, Colo. Robinson has also been promoted to president and chief investment officer. Previously, he was executive vice president and chief investment officer of Aimco and president and chief executive officer of Aimco Capital. Robinson replaces Tom Herzog, who resigns but remains with the company in an advisory capacity.

Paul J. Pucino, 48, was named CFO and executive vice president of THQ Inc., the $1 billion developer and publisher of interactive entertainment software and video games, based in Agoura Hills, Calif. Pucino brings broad financial leadership, corporate development and investor relations experience to THQ. Most recently, Pucino served as executive vice president and CFO of Classmates Media Corp., a wholly owned subsidiary of United Online.

Brian Evans, 41, becomes CFO on Aug. 2 of GEO Group, the $1 billion provider and manager of correctional, detention, mental health and residential treatment facilities, based in Boca Raton, Fla. Evans, who joined GEO Group in 2000, is currently vice president of finance and treasurer. Evans will replace John G. O’Rourke, who will retire on his 59th birthday, Aug. 1.

Kathleen E. Redd , 47, adds the title of CFO to her position of vice president of GenCorp., the $745 million aerospace and defense systems producer, based in Rancho Cordova, Calif. Redd had been the acting CFO of GenCorp since former CFO Yasmin Seyal left the company in September. Redd joined GenCorp in 2002 as assistant corporate controller.

Pressure is on SOX Laggards

Checkpoint's new tools offer a top-down, risk-based approach for conducting internal audits.

The Obama administration’s new Securities Exchange Commission head Mary Schapiro has made it clear that there will be no more delaying of the Sarbanes-Oxley Section 404 reporting requirement for so-called non-accelerated filers. These are public companies with market caps of under $75 million a year, a group that has been growing dramatically thanks to the stock market collapse.

The pressure is now on firms to find cost-effective ways to conduct self-assessments of their internal controls. Recognizing that smaller firms (including newly smaller ones) have concerns about the cost of compliance, Schapiro, during her Senate her confirmation hearing, promised to “make sure” smaller public companies “have the tools they need to comply with 404.” One option for meeting the Dec. 31 compliance deadline could be a new set of tools being offered by Thomson Reuters, both additions to the firm’s Checkpoint Tools product line. The tools can also be used by much larger firms for their SOX 404 compliance work, says Scott Spradling, senior director for new product development in the company’s tax and accounting division.

The SMART Practice Aids-Internal Audit “walks internal auditors through a top-down risk-based approach,” Spradling says. The tool creates test programs and also generates documentation in MS Word file format, which can be stored in any platform being used by the company. The second tool, Checkpoint Tools for Internal Audit, he says, allows internal audits to be conducted of any financial statement area of the company, such as accounts receivable or financial instruments, providing a complete set of checklists and practices.

JP Morgan Beefs Up Payable Web Services System

Two enhancements aim to help prevent fraud and ease reporting and reconciliation.

For companies still bogged down with burdensome paper check operations for their payment systems, JP Morgan’s Treasury Services has added two enhancements to its now 5-year-old Payable Web Services system. Clients can now “manage automated clearing house (ACH) debit and credit transactions and mitigate fraud online,” says Iqbal “Iggy” Khan, executive director for the company’s disbursements business,

The second enhancement,he says,allows companies that still use mainly paper checks to streamline the process, including having checks printed and sent out by JP Morgan. “An increasing number of companies are moving away from paper checks,” says Khan, as well as moving their checking business to larger service providers to save money. This, too, reduces fraud since there are not “a lot of blank check stacks floating around your office,” he says. Whether a company continues to use checks or shifts to an ACH payment system, Khan says, the enhanced system offers fraud prevention, reconciliation and reporting and data files that can be uploaded into any company’s ERP platform.